Walking Along the Fiscal Cliff

December 20th, 2012 by Temple City Tribune

Let me begin by giving thanks to Ben Bernanke for coming up with this highly charged phrase: The Fiscal Cliff. The folks on the television have certainly run with it. I do believe that there’s an urgency to sort out our nation’s financial responsibilities. Regrettably, so much that’s being said is at best infotainment and at worst a factual sleight of hand. I find the media’s presentation of this supposed Fiscal Cliff frustrating. I look at it like this: Our nation’s financial difficulties are not natural phenomena or an act of God. This is a man-made crisis; consciously created with intent.
The term Fiscal Cliff is a misnomer. Fiscal Slope would be more appropriate and the trajectory is what so many have been clamoring for. The hit American families and the federal budget will take won’t be some dramatic knockout punch (sorry Manny Pacquiao). Everyone’s purse strings will indeed tighten over the next year. The economic effects will be felt in stages for families, states and the federal government.
Let me begin with a very brief synopsis of the fiscal situation looming on the horizon. On January first, there may be two abrupt changes to the federal government’s budget. One: the temporary tax cuts, authorized in 2001 by President George W. Bush, will expire. Almost everyone will pay higher taxes and the government will generate a larger income. Two: Our country may be forced to reduce its expenditures by 1.2 trillion dollars over the next ten years. Half directly affecting the military budget and the other half focused on nondefense spending including the big entitlements. This is being called the Sequestration. Medicare will be reduced by 2%, and for now Social Security and Medicaid would be exempt. Less government spending will reduce the national deficit, but roughly 1 million jobs dependent on this money may be lost*. That’s it in a nutshell.
All of this was planned to reduce the national debt in the name of fiscal responsibility. If this goal is important to you, as it is to me, the expiration of the temporary ‘Bush’ tax cuts and the mandated federal spending limits are desirable steps in the deficit reduction direction. Everyone knows that living on substantially less money is hard. To varying degrees, we have all agreed to bite the bullet for the greater good. Due to the increased revenues and mandated belt tightening, the annual deficit—the difference between what the government takes in and what it spends—could be reduced by roughly half by the end of 2013**. This could be looked on favorably, wherever you reside along the political spectrum.
However, America’s economic growth may indeed stall. Less money released into the system will slow down the gears of our national economy. People will have less money to spend. Businesses too will inevitably reduce their expenditures. The federal government will funnel less money into the economic pipeline. This is the tradeoff. Dam the river and the water levels decline. Listening to the talking heads on the television, political agreement on an alternative method for reducing the deficit doesn’t appear on the horizon. This Sequestration is the path our elected officials have chosen, and last month we again chose our elected officials.
As a Certified Financial PlannerTM practitioner, I prefer predictability and stability. Whatever the outcome of these Fiscal Cliff negotiations, we need for the rules to be set. What is most destabilizing to our economy is the uncertainty of what our national taxation and spending structures will be. Financial markets hinge on perception and at the moment our vision is cloudy. We all make financial decisions on what we can reasonably expect to experience in the near future. What will create a true crisis is our inability to assess risk. For now, we are a nation in waiting. Uncertainty in fiscal policy poses the most significant near-term threat to markets. Once congress and the President reach an agreement, whatever it may be, we can start making informed decisions again.
Until then, please plan on ringing in the New Year with family, friends and loved ones. Watch the unfolding drama warily. Oh, and about the impending doom due to the Mayan calendar running out: not to worry, we switched over to the Gregorian one a while back. We must all still invest in and for the future.